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Definitions for Capital gains

Abbreviations

The following is a list of some of the abbreviations that we use in this guide:

ABIL

Allowable business investment loss

ACB

Adjusted cost base

CCA

Capital cost allowance

CNIL

Cumulative net investment loss

FMV

Fair market value

LPP

Listed personal property

RFL

Restricted farm loss

UCC

Undepreciated capital cost

Adjusted cost base (ACB)

Usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees.

The cost of a capital property is its actual or deemed cost, depending on the type of property and how you acquired it. It also includes capital expenditures, such as the cost of additions and improvements to the property. You cannot add current expenses, such as maintenance and repair costs, to the cost base of a property.

When applying losses of other years to a year in which there is a capital gain, you need the inclusion rates for the year in which the capital loss was realized and the year to which the loss is applied to, to calculate your net capital loss available for carryforward. You determine the adjustment factor (AF) by dividing the inclusion rate for 2015 (or year you want to apply your loss to) by the inclusion rate for the year in which the loss was realized. See How are other year losses carried forward to 2015? The following example shows how the adjustment factor is calculated.

Example

Andrew realized a capital gain of $5,000 in 2015. Andrew's taxable capital gain for 2015 is $2,500 ($5,000 × 50%). Andrew has a net capital loss of $1,000 from 1999 to apply against his taxable capital gain of $2,500. Since the inclusion rate in 1999 was 75%, he calculates the adjustment factor as follows:

A ÷ B = 50% ÷ 75% = 66.6666%

whereA = Inclusion rate for the year to which the loss is appliedB = Inclusion rate for the year in which the loss arose

To determine the net capital loss he can carry forward to 2015, Andrew multiplies the adjustment factor by the net capital loss for 1999:

Net capital loss for carryforward

= Adjustment factor × net capital loss

= 66.6666% × $1,000

= $666.66

Andrew claims the adjusted net capital loss of $666.66 on line 253 against his taxable capital gain of $2,500 reported on line 127 of his 2015 income tax and benefit return.

Allowable capital loss

Your capital loss for the year multiplied by the inclusion rate for that year. For 2001 and subsequent years, the inclusion rate is ½.

Arm's length transaction

Refers to a transaction between persons who act in their separate interests. An arm’s length transaction is generally a transaction that reflects ordinary commercial dealings between parties acting in their separate interests.

“Related persons” are not considered to deal with each other at arm’s length. Related persons include individuals connected by blood relationship, marriage, common law partnership or adoption (legal or in fact). A corporation and another person or two corporations may also be related persons.

"Unrelated persons" may not be dealing with each other at arm’s length at a particular time. Each case will depend upon its own facts. The following criteria will be considered to determine whether parties to a transaction are not dealing at arm’s length:

whether there is a common mind which directs the bargaining for the parties to a transaction;

whether the parties to a transaction act in concert without separate interests; "acting in concert" means, for example, that parties act with considerable interdependence on a transaction of common interest; or

whether there is de facto control of one party by the other because of, for example, advantage, authority or influence.

a corporation controlled, directly or indirectly in any way, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation), by one or more corporations described in paragraph c), or by any combination of the above;

a corporation that would be controlled by one person if that one person owned all the shares of any corporation that are owned by any non-resident person, by any public corporation (other than a prescribed venture capital corporation), or by a corporation described in paragraph c); or

a corporation, a class of the shares of capital stock of which is listed on a designated stock exchange.

Canadian security

Is:

a share of the capital stock of a corporation resident in Canada;

a unit of a mutual fund trust; or

a bond, debenture, bill, note, mortgage, hypothecary claim, or similar obligation issued by a person resident in Canada.

Prescribed securities are not considered to be Canadian securities.

Capital cost allowance (CCA)

In the year you buy a depreciable property, such as a building, you cannot deduct its full cost. However, since this type of property wears out or becomes obsolete over time, you can deduct its capital cost over a period of several years. This deduction is called CCA. When we talk about CCA, a reference is often made to class. You usually group depreciable properties into classes. You have to base your CCA claim on the rate assigned to each class of property.

Capital gain

You have a capital gain when you sell, or are considered to have sold, a capital property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.

Capital loss

You have a capital loss when you sell, or are considered to have sold, a capital property for less than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.

Capital property

Includes depreciable property, and any property which, if sold, would result in a capital gain or a capital loss. You usually buy it for investment purposes or to earn income. Capital property does not include the trading assets of a business, such as inventory. Some common types of capital property include:

cottages;

securities, such as stocks, bonds, and units of a mutual fund trust; and

land, buildings, and equipment you use in a business or a rental operation.

Common-law partner

This applies to a person who is not your spouse, with whom you are living and have a conjugal relationship, and to whom at least one of the following situations applies. He or she:

has been living with you in a conjugal relationship, and this current relationship has lasted at least 12 continuous months;

Note

In this definition, “12 continuous months” includes any period you were living separate and apart for less than 90 days because of a breakdown in the relationship.

is the parent of your child by birth or adoption; or

has custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support.

Deemed acquisition

Expression used when you are considered to have acquired property, even though you did not actually buy it.

Deemed cost

Refers to the price of property you are considered to have acquired, even though you did not actually buy it.

Deemed disposition

Expression used when you are considered to have disposed of property, even though you did not actually sell it.

Deemed proceeds of disposition

Expression used when you are considered to have received an amount for the disposition of property, even though you did not actually receive the amount.

Depreciable property

Usually capital property used to earn income from a business or property. The capital cost can be written off as CCA over a number of years.

Disposition (dispose of)

Usually an event or transaction where you give up possession, control, and all other aspects of property ownership.

Eligible amount of the gift

This is generally the amount by which the fair market value (FMV) of the gifted property exceeds the amount of an advantage, if any, received or receivable for the gift.

The advantage is generally the total value of any property, service, compensation, use or any other benefit that you are entitled as partial consideration for, or in gratitude for, the gift. The advantage may be contingent or receivable in the future, either to you or a person or partnership not dealing at arm's length with you. There are also situations in which the eligible amount may be deemed to be nil. For more information, see the section called "Deemed fair market value" in Pamphlet P113, Gifts and Income Tax.

Generally, this is a taxable Canadian corporation, where all or substantially all of the fair market value (FMV) of its assets are used principally in an active business carried on primarily in Canada by the corporation or by a related active business corporation while the investor holds the shares, or for at least 730 days of the ownership period . It can also be shares of, and/or a debt issued by, other related active business corporations or a combination of such assets, shares, or debt.

Note

An eligible active business corporation does not include:

a professional corporation;

a specified financial institution;

a corporation whose principal business is leasing, renting, developing, or selling real property that it owns or any combination of these activities; and

a corporation where more than 50% of the FMV of its property (net of debts incurred to acquire the property) is attributable to real property.

Eligible capital property

Property that does not physically exist but gives you a lasting economic benefit. Examples of this kind of property are goodwill, customer lists, trademarks, and milk quotas.

Eligible small business corporation

Generally, this is a Canadian-controlled private corporation, where all or substantially all of the FMV of its assets are used principally in an active business that is carried on primarily in Canada by the corporation or an eligible small business corporation related to it. It can also be shares of, and/or a debt issued by, other related eligible small business corporations or a combination of such assets, shares, or debt. The issuing corporation must be an eligible small business corporation at the time the shares were issued.

Note

An eligible small business corporation does not include:

a professional corporation;

a specified financial institution;

a corporation whose principal business is leasing, renting, developing, or selling real property that it owns or any combination of these activities; and

a corporation where more than 50% of the FMV of its property (net of debts incurred to acquire the property) is attributable to real property.

Excepted gift

A gift of a share you made to a donee with whom you deal at arm's length. The donee cannot be a private foundation. If the donee is a charitable organization or public foundation, it will be an excepted gift if you deal at arm's length with each director, trustee, officer, and official of the donee.

Usually the highest dollar value you can get for your property in an open and unrestricted market, between a willing buyer and a willing seller who are acting independently of each other.

Inclusion rate (IR)

The rate used to determine taxable capital gains and allowable capital losses. Generally, the inclusion rate for 2015 is ½. This means that you multiply your capital gain for the year by this rate to determine your taxable capital gain. Similarly, you multiply your capital loss for the year by ½ to determine your allowable capital loss. The inclusion rate has changed over the years. For prior year rates, see Inclusion rates for previous years.

Listed personal property (LPP)

A type of personal-use property. The principal difference between LPP and other personal-use properties is that LPP usually increases in value over time. LPP includes all or any part of any interest in or any right to the following properties:

prints, etchings, drawings, paintings, sculptures, or other similar works of art;

jewellery;

rare folios, rare manuscripts, or rare books;

stamps; and

coins.

Net capital loss

Generally, if your allowable capital losses are more than your taxable capital gains, the difference between the two becomes part of the computation of your net capital loss for the year.

Non-arm's length transaction

A transaction between persons who are related to each other. However, a non-arm’s length relationship might also exist between unrelated individuals, partnerships or corporations, depending on the circumstances. For more information, see arm's length transaction).

Non-qualifying real property

Generally, non-qualifying real property is real property that you or your partnership disposed of after February 1992 and before 1996.

It also generally includes the following property you or your partnership disposed of after February 1992 and before 1996, if its fair market value is derived principally (more than 50%) from real property:

Amounts that you incurred to sell a capital property. You can deduct outlays and expenses from your proceeds of disposition when calculating your capital gain or loss. You cannot reduce your other income by claiming a deduction for these outlays and expenses. These types of expenses include fixing-up expenses, finders' fees, commissions, brokers' fees, surveyors' fees, legal fees, transfer taxes, and advertising costs.

Personal-use property

Refers to items that you own primarily for the personal use or enjoyment of your family and yourself. It includes all personal and household items, such as furniture, automobiles, boats, a cottage, and other similar properties.

Prescribed security

Generally includes:

a share of a corporation (other than a public corporation) whose value at the time you dispose of it comes mainly from real estate, resource properties, or both;

a bond, debenture, bill, note, mortgage, or similar obligation of a corporation (other than a public corporation) that you do not deal with at arm's length at any time before you dispose of the security; and

a share, bond, debenture, bill, note, mortgage, or similar obligation you acquire from a person with whom you do not deal at arm's length.

Usually the amount you received or will receive for your property. In most cases, it refers to the sale price of the property. This could also include compensation you received for property that has been destroyed, expropriated, or stolen.

Public corporation

A corporation that is resident in Canada and:

has a class of shares listed on a designated Canadian stock exchange; or

is a corporation (other than a prescribed labour-sponsored venture capital corporation) that has elected, or has been designated by the Minister of National Revenue, to be a public corporation. Also, at the time of the election or designation, the corporation complied with prescribed conditions concerning the number of its shareholders, the dispersal of ownership of its shares, and the public trading of its shares.

registered housing corporations resident in Canada set up only to provide low-cost housing for the aged;

registered municipalities in Canada;

registered municipal or public bodies performing a function of government in Canada;

the United Nations and its agencies;

registered universities outside Canada that are prescribed to be universities the student body of which ordinarily includes students from Canada;

Her Majesty in Right of Canada, or a province, or a territory; and

before June 23, 2015, registered foreign charitable organizations to which Her Majesty in right of Canada has made a gift. For gifts made on or after June 23, 2015, registered foreign charities (which now include foreign charitable foundations) to which Her Majesty in right of Canada has made a gift.

Certain property you or your spouse or common-law partner owns. It is also certain property owned by a family-farm or fishing partnership in which you or your spouse or common-law partner holds an interest.

Qualified farm or fishing property (QFFP) includes:

a share of the capital stock of a family-farm or fishing corporation that you or your spouse or common-law partner owns;

an interest in a family-farm or fishing partnership that you or your spouse or common-law partner owns;

real property, such as land, buildings, and fishing vessels; and

eligible capital property, such as milk and egg quotas, or fishing licenses.

A share of a corporation will be considered to be a qualified small business corporation share if all the following conditions are met:

at the time of sale, it was a share of the capital stock of a small business corporation, and it was owned by you, your spouse or common-law partner, or a partnership of which you were a member;

throughout that part of the 24 months immediately before the share was disposed of, while the share was owned by you, a partnership of which you were a member, or a person related to you, it was a share of a Canadian-controlled private corporation and more than 50% of the fair market value of the assets of the corporation were:

used mainly in an active business carried on primarily in Canada by the Canadian-controlled private corporation, or by a related corporation;

certain shares or debts of connected corporations;

or a combination of these two types of assets;

and throughout the 24 months immediately before the share was disposed of, no one owned the share other than you, a partnership of which you were a member, or a person related to you.

Generally, when a corporation has issued shares after June 13, 1988, either to you, to a partnership of which you are a member, or to a person related to you, a special situation exists. We consider that, immediately before the shares were issued, an unrelated person owned them. As a result, to meet the holding-period requirement, the shares cannot have been owned by any person other than you, a partnership of which you are a member, or a person related to you for a 24-month period that begins after the shares were issued and that ends when you sold them.

However, this rule does not apply to shares issued:

as payment for other shares;

for dispositions of shares after June 17, 1987, as payment of a stock dividend; or

in connection with a property that you, a partnership of which you were a member, or a person related to you disposed of to the corporation that issued the shares. The property disposed of must have consisted of either:

all or most (90% or more) of the assets used in an active business carried on either by you, the members of the partnership of which you were a member, or the person related to you; or

an interest in a partnership where all or most (90% or more) of the partnership's assets were used in an active business carried on by the members of the partnership.

Real property

Property that cannot be moved, such as land or buildings. We commonly refer to such property as real estate.

Recapture

When you sell a depreciable property for less than its capital cost, but for more than the undepreciated capital cost (UCC) in its class, you do not have a capital gain. However, if there is a negative UCC balance at the end of the year, this balance is a recapture of capital cost allowance. You have to include this amount in income for that year. For more information, see recapture.

Small business corporation

A Canadian-controlled private corporation in which all or most (90% or more) of the fair market value of its assets:

are used mainly in an active business carried on primarily in Canada by the corporation or by a related corporation;

are shares or debts of connected corporations that were small business corporations; or

are a combination of these two types of assets.

Spouse

Applies only to a person to whom you are legally married.

Taxable capital gain

The portion of your capital gain that you have to report as income on your income tax and benefit return.

Occurs when you have an undepreciated balance in a class of depreciable property at the end of the tax year or fiscal year, and you no longer own any property in that class. You can deduct the terminal loss when you calculate your income for the year. For more information, see terminal losses.

Undepreciated capital cost (UCC)

Generally, UCC is equal to the total capital cost of all the properties of the class minus the capital cost allowance you claimed in previous years. If you sell depreciable property in a year, you also have to subtract from the UCC one of the following two amounts, whichever is less:

the proceeds of disposition of the property (either actual or deemed) minus the outlays and expenses incurred to sell it; or